From: <eric@voskuil.org>
To: "'ZmnSCPxj'" <ZmnSCPxj@protonmail.com>,
 "'Bitcoin Protocol Discussion'" <bitcoin-dev@lists.linuxfoundation.org>
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Date: Fri, 9 Jul 2021 17:49:52 -0700
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Cc: 'Billy Tetrud' <billy.tetrud@gmail.com>
Subject: Re: [bitcoin-dev] Proof of reserves - recording
Precedence: list

> Good morning e,

Good afternoon Z.

> >     Any expectation of interest implies borrowing, in other words, a =
loan to
> the bank.
>=20
> Perhaps this is the key point of contention?

I'm not sure, but from my observations it's long been a point of =
confusion in Bitcoiner understanding of banking.

To put a finer point on it, Rothbard's criteria is a vague in a couple =
ways. Earnings that offset fees are also "interest" in the economic =
context - in which he writes. So even a zero-interest account (or =
negative up to the full cost of maintaining the account) qualifies under =
this criterion. Yet he is careful to say "implies". The arrangement may =
of course be explicit, in which case one no longer relies on implied =
contract, one relies on explicit contract. Finally, one may "expect" no =
interest, and even pay fees, but it may nonetheless be a loan. This is =
what contracts are for.

If one contracts for warehousing service, such Safe Deposit, as opposed =
to a time deposit, such as Certificate of Deposit, Savings Account, or =
Checking Account, then one gets a warehousing service - full fees and a =
contractual obligation to maintain 100% of the deposit. There are also =
money transmission services that move money around for a fee. The =
inability to distinguish money from credit (including money substitutes) =
and warehousing from investment (including "banking") leads directly to =
false conclusions regarding money and banking. Unfortunately a good =
number of self-described "Austrians" perpetuate these errors.

> In cases where Bitcoin is given over to an exchange, there is no =
expectation
> of interest, at least in the sense that there is no expectation that =
the number
> of Bitcoins deposited in the exchange *increase* over time.
> (There may be an expectation of an increase in the number of green-ink
> historical commemoration papers it can buy, but the point is that the =
number
> of Bitcoins held in behalf of the user is not expected to change)
>=20
> The expectation is that exchanges earn money from the difference =
between
> buy-price and sell-price, and the money-warehousing service they =
provide is
> simply provided for free to facilitate their *main* business (i.e. =
brokers for
> *exchange*).
> Thus, the expectation is that the exchange provides a warehouse =
service,
> not a bank service, and this service is provided for free since it =
enables their
> *real* business of earning from bid-ask spreads.

I'm not aware of what are people's expectations, nor would I judge what =
qualifies as someone's "real" business, but a warehouse that facilitates =
trades for a fee is of course a possible business model. PayPal's =
intended (real?) business model was to earn from the float. That didn't =
pan out, because people didn't retain money in their transmitter =
service.=20

Exchanges that deal in monopoly money must move this through traditional =
finance. This incurs all manner of risk. When someone sends them =
monopoly money, there is no crypto-surety possible. This is part of =
their "reserve" just as is the other side of trades.

What matters is what people contract for - agree to, voluntarily.

> On the other hand, not your keys not your coins, so anyone who uses =
such a
> warehouse has whatever happens to the funds coming for them...

One of the essential benefits of Bitcoin being that you can be your own =
warehouse, and be your own money transmitter.

But all production requires investment, which inherently entails letting =
go of your money, producing something with it, and selling it to people =
for other money. All investment is from someone's "reserve". Full =
reserve investment (including banking) is an oxymoron. So whether =
through exchanges or otherwise, there will be production, risk, loss and =
earnings. Otherwise there will be nothing at all to buy, and all money =
will be worthless. This idea of assuring that money is fully reserved =
applies only to that which one does not invest (one's hoard); it does =
not apply to banks, or the capital of any other companies. If it can =
help people feel better about their Safe Deposit (warehousing), I'm all =
for it. But if one wants a 20% bitcoin reserve, one can certainly place =
20% into cold storage.

> And of course exchanges need not earn money *just* from bid-ask =
spreads
> *in practice*, so they are unlikely to provide proof-of-reserves =
either.

If they did not earn money as a bank, the explicit cost of their =
services would be that much higher. Which people prefer is of course =
entirely up to them. I don't know which is more likely.

> Indeed, money warehousing may very well be provided by means other =
than
> proof-of-reserves, such as by using multisig the way Green wallet =
does, with
> better security.

Right, this is an aspect of using your own wallet.

> Perhaps "pure exchanges" would be more amenable to such a scheme
> rather than proof-of-reserves.

Or simply pairing traders, which is of course an existing model.

Best,
e

> Regards,
> ZmnSCPxj